Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing
Human mortality has been improving faster than expected over the past few decades. This unprecedented improvement has caused significant financial stress to pension plan sponsors and annuity providers. The widely recognized Lee–Carter model often assumes linearity in its period effect as an integral...
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| Format: | Article |
| Language: | English |
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MDPI AG
2023-11-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/11/12/207 |
| _version_ | 1797379404316278784 |
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| author | Huijing Li Rui Zhou Min Ji |
| author_facet | Huijing Li Rui Zhou Min Ji |
| author_sort | Huijing Li |
| collection | DOAJ |
| description | Human mortality has been improving faster than expected over the past few decades. This unprecedented improvement has caused significant financial stress to pension plan sponsors and annuity providers. The widely recognized Lee–Carter model often assumes linearity in its period effect as an integral part of the model. Nevertheless, deviation from linearity has been observed in historical mortality data. In this paper, we investigate the applicability of four nonlinear time-series models: threshold autoregressive model, Markov switching model, structural change model, and generalized autoregressive conditional heteroskedasticity model for mortality data. By analyzing the mortality data from England and Wales and Italy spanning the years 1900 to 2019, we compare the goodness of fit and forecasting performance of the four nonlinear models. We then demonstrate the implications of nonlinearity in mortality modeling on the pricing of longevity bonds as a practical illustration of our findings. |
| first_indexed | 2024-03-08T20:23:44Z |
| format | Article |
| id | doaj.art-17db2de3c0ae40629e81a595404132d4 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-03-08T20:23:44Z |
| publishDate | 2023-11-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-17db2de3c0ae40629e81a595404132d42023-12-22T14:39:31ZengMDPI AGRisks2227-90912023-11-01111220710.3390/risks11120207Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond PricingHuijing Li0Rui Zhou1Min Ji2College of Finance, Nanjing Agricultural University, Nanjing 210095, ChinaDepartment of Economics, The University of Melbourne, Melbourne, VIC 3010, AustraliaDepartment of Mathematics, Towson University, Towson, MD 21252, USAHuman mortality has been improving faster than expected over the past few decades. This unprecedented improvement has caused significant financial stress to pension plan sponsors and annuity providers. The widely recognized Lee–Carter model often assumes linearity in its period effect as an integral part of the model. Nevertheless, deviation from linearity has been observed in historical mortality data. In this paper, we investigate the applicability of four nonlinear time-series models: threshold autoregressive model, Markov switching model, structural change model, and generalized autoregressive conditional heteroskedasticity model for mortality data. By analyzing the mortality data from England and Wales and Italy spanning the years 1900 to 2019, we compare the goodness of fit and forecasting performance of the four nonlinear models. We then demonstrate the implications of nonlinearity in mortality modeling on the pricing of longevity bonds as a practical illustration of our findings.https://www.mdpi.com/2227-9091/11/12/207mortality modellinglongevity bond pricingnonlinearitythreshold autoregressive modelmarkov-switchingstructural change |
| spellingShingle | Huijing Li Rui Zhou Min Ji Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing Risks mortality modelling longevity bond pricing nonlinearity threshold autoregressive model markov-switching structural change |
| title | Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing |
| title_full | Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing |
| title_fullStr | Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing |
| title_full_unstemmed | Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing |
| title_short | Nonlinear Modeling of Mortality Data and Its Implications for Longevity Bond Pricing |
| title_sort | nonlinear modeling of mortality data and its implications for longevity bond pricing |
| topic | mortality modelling longevity bond pricing nonlinearity threshold autoregressive model markov-switching structural change |
| url | https://www.mdpi.com/2227-9091/11/12/207 |
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